How big is the difference between EBITDA and EBIT for companies in different sectors?
Let’s find out by comparing the 2017 EBITDA and EBIT numbers
for the Dow Jones Industrial Average companies!
Let’s quickly revisit the definition of EBITDA.
EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
The difference between EBITDA and EBIT is in the last two letters of the acronym: Depreciation
and Amortization.
EBITDA is higher than EBIT, as it excludes more expense line items.
Let’s take the 30 companies in the Dow Jones Industrial Average as a benchmark, and review
their EBITDA and EBIT as percentage of revenue for 2017.
As you can see, the Dow Jones Industrial Average consists of companies in a wide range of industries:
from pharmaceuticals to retail to software, and many other sectors.
Most companies report by calendar year.
In case their fiscal year is different from the calendar year, for example Apple has a
fiscal year running from October to September, I have taken the numbers for the fiscal year
that most closely matches the 2017 calendar year.
In order to provide meaningful comparisons, let’s first take the companies in banking,
financial services and insurance out of our sample.
Terms like Operating Income, EBIT and EBITDA are not meaningful metrics for this sector.
We now have 25 companies left.
Take a good look at the logos of these companies, as we have a polling question coming up.
Which of these companies has the highest Depreciation & Amortization as % of revenue (in other words
the biggest “gap” between EBITDA and EBIT) in 2017?
Is it oil and gas company Chevron, pharmaceutical company Merck, pharmaceutical company Pfizer,
or telecom company Verizon?
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Which of these companies has the highest Depreciation & Amortization as % of revenue in 2017?
The answer is: oil and gas company Chevron,
with Depreciation & Amortization of 14.4% of revenue.
Telecommunications company Verizon is very close to that, at 13.5% of revenue.
Pharmaceutical companies Pfizer and Merck are at 11.9% and 11.6% of revenue respectively.
Let’s look at Depreciation and Amortization as percentage of revenue for each of the 25
companies in the sample for 2017.
They all fall within the range of 0% to 15% of revenue, with more than half the companies
in the lower third of this scale.
So what causes a company to have higher depreciation and amortization as percentage of revenue
than others?
There could be multiple reasons.
Accounting-driven: companies may or may not be using the straight-line method (some use
a higher percentage of depreciation in early years of an asset), and the useful economic
lives of assets may differ between companies.
Business-model-wise: if a company is very capital-intensive, owning a lot of property,
plant and equipment, depreciation will be higher.
If a company has done a lot of acquisitions, it may have a lot of intangible assets on
the balance sheet that get amortized.
If a company has done a lot of investments in the past decade, it is likely to have more
depreciation and amortization than a company that did the majority of its investments several
decades ago and now has part of its fixed asset base fully depreciated.
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